Warburg negotiates to buy up to 40 per cent stake for Rs 2,300 crore of Tata Tech

Mumbai: Private equity firm Warburg Pincus is in advanced negotiations to acquire asignificant minority stake of up to 40 per cent in Tata Technologies for around Rs 2,300 crore, ending months of talks, said several people with knowledge of the matter.

The engineering design services company has been looking to offload 26-40 per cent of equity at a valuation of Rs 5,400 crore ($800 million) for almost a year and a half, said the people cited above.

It had also considered selling a majority stake to investors and an initial public offering, they said. “Warburg is the only investor with whom the Tatas are currently engaged,” said one of the persons.

“It will be interesting to see if Tatas give a revenue commitment for the future. The worry is the industry still looks at the company as a quasi-captive unit.”

A formal announcement is said to be imminent. The Singapore-headquartered company was founded in 1989 as a subsidiary of Tata Motors before becoming a standalone entity. Tata Motors still owns around 70 per cent of the company.

Second-Largest Shareholder

Tata Group entities such as Tata Capital and senior executives own 17 per cent while the rest is held by outside financial investors.

If a deal takes place, the new investor will likely become the second-largest shareholder after Tata Motors while existing ones like Tata Capital are likely to cash out, either in part or fully, said the people cited above.

The company says it’s a leader in “engineering services outsourcing and product development IT services to the global manufacturing industry” and looks to “apply cutting-edge technology to provide a competitive advantage to customers in the manufacturing sector”, according to its website.

More than half its turnover and a bigger share of profit come from Tata units, particularly Tata Motors and its Jaguar Land Rover (JLR) division. A third of its revenue comes from North America, Europe and the Asia-Pacific.

Nearly 65 per cent of its business comes from the automotive sector, 12 per cent from aerospace and the rest from industrial machinery and other businesses.

The company has been trying to increase its aerospace portfolio, especially in defence, as a de-risking strategy. Growing at a compounded annual growth rate of 16 per cent, the company is targeting $800 million (around Rs 5,300 crore) in revenue by 2020, $200 million of that through acquisitions.

In 2015-16, its consolidated revenue was Rs 2,714 crore and profit after tax was Rs 382 crore. A Warburg spokesperson declined to comment. “As stated before, from time to time, we review the performance of our non-core assets and companies and see how we can monetise them,” a Tata Motors spokesperson said.

“We do not have any additional comment to offer at this point of time.” Tata Motors has already announced annual capital expenditure plans of Rs 3,500-4,000 crore for the next three years, mainly to spruce up and strengthen its passenger car range.

JLR is to spend 3.5-4 billion pounds on capex. There was no response to emails sent to Tata Technologies CEO Warren Harris or the company’s spokesperson.

Other contenders

Carlyle, Apax Partners, the Canada Pension Plan Investment Board (CPPIB), Government of Singapore Investment Corporation (GIC) were all said to have previously evaluated the company but eventually opted out.

The initial valuation expectation of $1 billion was also a spoiler for most. The Tata Group had mandated Citi to find a strategic partner for the company.

“There is growing interest for businesses that provide solutions to the aerospace and defence sectors both from strategic investors as well as financial sponsors,” said Sanjeev Krishan, partner at PricewaterhouseCoopers.

“As automation increases, the need for technology solutions will increase leading to the attractiveness of such businesses from an investor’s standpoint.”

Warburg, among the earliest PE investors in India, successfully exited its investment in QuEST Global Services Pte, another engineering solutions provider, last February.

Bain Capital, GIC and Advent International cumulatively invested $350 million to pick up minority stakes. Warburg, which has deployed $3.8 billion in 51 companies in India since 1997, is looking to deepen its involvement, co-chief executives Charles R Kaye and Joseph P Landy told ET in a recent interview.

It plans to invest $8 billion in India over the next 10 years — twice what it did in two decades — as the New York-headquartered firm extends its long-term bet on one of its “most important markets in the world”. Last month it invested Rs 840 crore in PVR for a 14 per cent stake. Tata Motors’ third-quarter profit plunged 96 per cent to Rs 112 crore from the year earlier because of losses in the domestic business and operational weakness in JLR.

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